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Plus The End Game, Irrelevant Central Banks and Turtles Trading Rules
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History is merely a list of surprises. ... It can only prepare us to be surprised yet again.
Kurt Vonnegut
The Interesting Time is a short note to help you better invest your time and money in an uncertain world and a digest of the most interesting things I find on the internet, typically centered around antifragility, investing, technology, complex systems, and decision making. Past editions are available here.
 
Hi there,

This week I released an interview with volatility trader Matt Rowe for the Mutiny Investing Podcast. We talk with Matt about why the best portfolios have both long and short volatility and how investors often get the mix wrong. We look at why we’ve seen an increase in volatility selling programs since 2017 as well as parallels between the convertible bond market in the late 90s/early 2000s and the present day. If you’re interested in being notified when the episode is released, you can subscribe to the podcast.

My Mutiny Fund partner and Chief Investment Officer, Jason Buck, recently got the chance to sit down with three of the best long volatility traders in the world including:

  • Jerry Haworth of 36 South talks about everything from hunting for bargains and ergodic economics to how he masterfully played the wild swings of 2020

  • Bastian Bolesta of Deepfield Capital breaks down the “four pillars” of his multi-strategy framework and reveals the intricacies behind each step which consist of the calendar spread, the inter-market spread, intraday trend following, and intraday VIX trading.

  • Chris Cole talks about why the 60/40 equity/bond split is full of risks investors don’t understand and advocates for the dragon portfolio, which consists of gold, long volatility, and commodity trend-following in addition to stocks and bonds.

You can also watch a condensed highlight cut of Jason's interview with Jerry, Bastian, and Chris.

If you really want to get your financial history education on (and I would recommend it…) then I asked Twitter for the best financial history books. The top recommendations were:

  1. The Ascent of Money
  2. Against the Gods
  3. Manias, Panics, and Crashes
  4. Debt: The First 5,000 Years
  5. Lords of Finance
  6. Devil Take the Hindmost

I've personally read The Ascent of Money, Debt, and Lords of Finance. I loved the first two and like the Lords of Finance as well. The others are now on my shortlist.

Finally, My friend Tiago Forte is opening enrollment for his popular knowledgement management course building a second brain. I’ve written extensively about the importance of good systems from annual reviews to SOPs. I wrote an article about how integrating Tiago’s approach to building a knowledge management system has helped me take those systems to the next level.


The Origins of Political Order


History is merely all the data we have so far. It’s important to emphasize both the “merely” and the “all” elements of that statement.

It is merely all the data because history is a non-ergodic process. All that means is that we don’t know what the future holds, but we know it won’t look exactly like the past. As Vonnegut said, “History is merely a list of surprises, It can only prepare us to be surprised yet again.”

However, it is all the data that we have. The future contains more possibilities than the past, but that means that it at least contains all the possibilities of the past so understanding those is a pretty good starting point.

My recipe for a good forecaster is two parts historian blended with one part technologist served over three cubes of epistemic humility garnished with plenty of skin in the game.

People attempting to predict the future often get lots of that equation wrong, but reading more history helps with the historian part and the epistemic humility part so it’s overall pretty useful.

For many of us, political and geopolitical institutions have become much more central in recent years and I think it’s important to understand the history of political institutions if one wants to have some understanding of where things may go in the future.

Francis Fukuyama's Origins of Political Order is one of the most insightful books on understanding what's going on today in geopolitics and political systems that I've read.

At the core of Fukuyama's thinking is the notion of an institution as a "stable, valued, recurring patterns of behavior that persist beyond the tenure of individual leaders."

The British Parliament persists even though its members come and go. It is stable and persists beyond an individual human lifespan. It is a habit that exists not at the level of a single individual, but a group.

He points out that most countries today face one (or more) of three challenges as it relates to political institutions.

  1. No functioning institutions - E.g. Post-Qaddafi Libya where there is no single, central source of authority that can provide security or the conditions for individuals to flourish.
  2. Decaying institutions - E.g. United States where many government institutions that are supposed to serve public purposes have been captured by powerful private interests to at least some meaningful degree.
  3. Social change outstripping existing institutions - E.g. Turkey and Brazil where social change as a result of rapidly expanding middle classes don’t have sufficient institutional support.

But what are political institutions in the first place and how did they come to exist?

The basis of institutions is in evolutionary biology: specifically kin selection and reciprocal altruism.

The first human groups were family-based bands. You and a bunch of your cousins, aunts and uncles would all hang out and walk around to wherever there was food.

This works because of the biological factor of k
in selection, a recurring pattern where all sexually reproducing animals behave altruistically towards those they share genes with. (Except, apparently, for that uncle that won't shut up on Thanksgiving and Christmas)

Reciprocal altruism is another well-observed tendency that unrelated individuals will engage in ongoing exchanges of favors that are mutually beneficial, a cornerstone of game theory, and the iterated prisoner’s dilemma. If you help out a friend that shares no genes with you, they tend to want to help you out back *unless they are a sociopath/a**hole) and that works out better for both of you in the long run.

Human beings, in other words, are social animals by nature and we tend to cooperate better with friends and family than strangers. This system, based on biology, worked fine when we lived in small bands of dozens of individuals.

So how did we get beyond hunter-gatherer bands to nation-states?

Humans are also norm-following creatures. We follow norms of behavior of others around them. This tends to get derided by some as being conformist, but it's generally very useful and was essential for the rise of institutions that could scale beyond the level of small bands.

Norms have often been given an intrinsic value and even worshipped as in the religious laws of many societies. Since an institution is nothing more than a norm that persists over time, human beings have a natural tendency to institutionalize their norms and behavior.

The transition from bands to tribal-level societies is rooted in kinship but required the emergence of religion. Tribal-level societies tended to believe in the ability of dead ancestors and unborn descendants to affect their health and happiness today and so rules that were said to honor them won out.

It just so happened that these rules also tended to promote effective cooperation. Rules such as those chronicled in the Ten Commandments fundamental to both Judaism and Christianity tend to include those which make it easier to cooperate and have a stable society. Thou shalt not murder, commit adultery or steal are all pretty useful rules for helping people get along in a way that allows them to maintain a stable social order and amass more resources over time.

By contrast, a religion based on the idea that it was totally cool to murder everyone would pretty quickly die out.

The next transition was from tribal societies to state-level societies where the state possesses a monopoly on coercion in a defined territory. “War made the state and the state made war.” If you try to set up a military force in Idaho and claim control over the territory, then some well-trained men and women from the American State will not take too kindly to that. They will show up with big guns and you will be in deep doo-doo.

Though we tend to take it for granted, the monopoly on coercion and violence in a given geographic area is central to the existence of a nation-state.

The key to this development of modern states was the shift of political organizations away from family and friends to impersonal institutions.

The transition from kin level (just family) to tribal level societies (friends and family) was pretty similar in all parts of the world, presumably because they are both rooted in human biology that we all share - kin selection and reciprocal altruism.

However, the transition from tribal level societies to modern states occurred differently in different places and the legacy of how these transitions happened is still visible today. More significantly, it explains the root of much geopolitical and cultural conflict.

There are three major elements of this transition to modern states: the state, the rule of law, and democratic accountability.

The State

In China, the state emerged earlier than anywhere else (3rd century BC) through civil service examinations, creating institutional norms around a strong central government.

The Arabs and Ottomans used slave-soldiers which were non-Muslim boys who were captured and taken from their families then raised to be soldiers and administrators loyal to the current ruler. Because they had no ties to the surrounding society, they effectively formed a military and bureaucracy that transcended kinship.

In Europe, the state emerged much later, however it came the Catholic Church changed the rules of inheritance to make it much more difficult for kin groups to pass resources down to their extended families. This was done in large part so that those resources would get left to the Church, but it had the long term effect of establishing the Catholic Church as a separate institution.

The Rules of Law

As a result, the rule of law, those rules that are binding on even the most politically powerful individuals, became most deeply institutionalized in Western Europe. The Church emerged as a political actor that could affect the fortune of Kings and Emperors.

In the eleventh century, the Catholic Church clashed with the Holy Roman Emperor over the question of the emperor’s interference in religious matters. In the end, the Church won and had the right to appoint its own priests and bishops - merging as the guardian of a revived Roman law based on the Justinian Code.

By contrast, China never developed a transcendental religion. Perhaps, for this reason, it never developed a true rule of law that its leaders were bound to. The Chinese state thus emerged without any constraint on the political power of its central leaders.

Democratic Accountability

The final institution to emerge was democratic accountability which grew out of the European feudal institution of estates, the elites on which the king relied to raise taxes and armies.

Under the feudal system, the elites controlled the wealth from the land and had small military forces so the king needed the elites to maintain a monopoly on force in his territory. This gave European elites leverage over the king that didn’t exist elsewhere in the world, though the exact balance of power evolved differently in different parts of Europe.

French and Spanish monarchs largely succeeded in reducing the power of elites and being more authoritarian.

In contrast, the elites in Poland and Hungary won out leading to a very weak central authority. Since the elites could not effectively coordinate to defend their borders, they were conquered by stronger neighbors and failed to develop a sufficiently strong central state.

Russia, somewhat similarly to France and Spain, had weaker elites and law exerted a weaker influence and so a more robust form of absolutism emerged there.

England was the one place where there was a relatively even balance between the power of the monarch and the Estates. When the early Stuart kings sought to build absolutist powers, they found themselves blocked by a well-organized and armed Parliament. The two sides fought a civil war which ultimately culminated in the Glorious Revolution of 1688–1689, where the Stuart dynasty was deposed and a new monarch, William of Orange, agreed to a constitutional settlement embodying the principle of “no taxation without representation”.

The next big development in democratic accountability was the founding of the United States.

The American experiment was unique in that it was the first state to fully acknowledge individual rights and equality. The Declaration of Independence said this in no uncertain terms:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights.”

The Constitution squarely vested sovereignty not in a king or an amorphous state but rather in “We the People.”

This was a big deal. These documents did not seek to re-create Britain’s hierarchical, class-defined society in North America, but establish a new system. While there have been many political and social barriers to de facto equality in the United States since, the burden has always been on anyone claiming special rights or privileges for a particular class to justify how they were compatible with the nation’s founding creed.

The basic political order established first in England by the Glorious Revolution then further expanded by the American Revolution would prove remarkably durable.

No one in the West subsequently argued that the government should not be accountable to “the People”; later debates and conflicts revolved entirely around the question of who counted as a full human being whose dignity was marked by the ability to participate in the democratic political system. These changes, though extremely important, were changes of degree more than of kind.

The institutions established in Europe, China, India, and The Middle East centuries ago are still the basis on which the nation-states in those areas operate today and help explain some of the conflicts we are witnessing today, perhaps most notably between China and Europe and it's former colonies.

Consider a leaked internal Chinese Communist party directive from 2013 which describes the party as being in the midst of an “intense, ideological struggle” for survival. According to the directive, the ideas that threaten China with “major disorder” include concepts such as “separation of powers,” “independent judiciaries,” and “universal human rights.”

For most people that grow up in the West, the idea of “universal human rights" as being a threat is almost inconceivable. All those things are mostly taken for granted as good and worth striving for. But, in the light of China’s historical lack of a transcendental religion or a strong institution outside the state, one can start to make a certain sense of how China might view that differently.

I have no idea what the future geopolitical order is going to look like. However, I do know both that it will not look like the past and that it will at the same time be grounded in the past. Many of our debates are grounded in these histories and we would do well to heed the context they provide.

 
Best Stuff I Read

Russel Napier: Central Banks Have Become Irrelevant
The Market

The Scottish market strategist Russell Napier warns that investors should prepare for inflation rates of 4% and more by next year. The main reason: Governments have taken control of the money supply.

Russel went on Grant Williams podcast, The End Game Ep. 5 - Russell Napier, to discuss the reasons behind the long-term disinflationist's recent decision to step off that train and prepare for the return of inflation.

His views focus on the emergence of fiscal stimulus around the world (The PPP program and unemployment assistance in the U.S. for example) where cash transfers are going into the hands of spenders rather than savers.


The Grant Williams Podcast

The counter to Napier's views is from Lacy Hunt. Lacy has made a 40-year bet on deflation in financial markets and he has been overwhelmingly correct.

Lacy uses his encyclopedic knowledge of econometric analysis, financial history and regulatory frameworks to explain why he remains resolute in the face a rising number of calls for the return of inflation.

He also gives an explanation for what it would take to change his mind, namely an amendment to the Federal Reserve Act which would make it possible for the Fed to print legal tender.

Original Turtles

One of the investment strategies which I find most interesting and compelling is trend-following. I find most people get interested in investing through the value school as represented by Warren Buffet: buy undervalued assets and wait for them to rise.

However, there's a very robust literature that says the opposite strategy works. Markets tend to trend and so you can outpeform by buying things that have already gone up and selling things that have already gone down.

The Turtles was a group of traders which made this strategy well known and made large profits in the commodities markets in the mid to late 20th century.

This PDF explaining the rules they used provides an interesting glimpse into the thinking and tactics behind trend following strategies.

 

If you know of someone that you think would enjoy this newsletter, please share it with them – I’d really appreciate it.

 
 
 
 
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Here are a few more things you might find interesting:
Newsletter Past Editions: Read past editions of The interesting Times Newsletter.

Interesting Essays: Read my best, free essays on topics like bitcoin, investing, decision making and marketing.

Mutiny Fund: Find out more about the Mutiny Investment Strategy and how it has been designed to act as a so-called ‘black swan’ investment. A form of ‘antifragility’ or ‘crisis alpha’ that is intended to achieve large asymmetric gains in times of high volatility or tail risk such as the 1987 flash crash, 1998-2001 dot com rise and crash, or 2008 financial crisis.

Consulting & Advising: Are you looking for help with making decisions around scaling your company from $500k to $5 million? I’ve been working with authors, entrepreneurs, and startups for half a decade to help them get more out of their businesses.

Internet Business Toolkit: An exhaustive list of all the online tools I use to be more productive.

 
P.S. If you'd like to see everything I'm reading, you can follow me on Twitter or LinkedIn for articles and podcasts. I'm on Goodreads for books. If you've read something you think I'd like, hit reply and let me know what's made an impact on your thinking lately (articles, books, papers, podcasts, whatever).
 
 
Futures and options trading involves a substantial risk of loss. You should therefore carefully consider whether such trading is appropriate for you in light of your financial condition. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author. The mention of specific asset class performance (i.e. S&P +3.2%, -4.6%) is based on the noted source index (i.e. S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self-reporting, and instant history.


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